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Hongkong and Shanghai Banking Corporation (HSBC) has been grabbing the headlines in recent months for all the wrong reasons. It has been accused of several things, from mis-selling complex financial products to its super-rich clients to erroneously mentioning Indian billionaire Mukesh Ambani in its list of beneficiary account holders in Switzerland.
Probably the most serious allegation was that HSBC worked hand-in-glove with several Indian industrialists, helping them conceal their black money in overseas bank accounts.
Activist-turned-politician Arvind Kejriwal, who accused the British lender of indulging in hawala or money laundering activities, feels it is easier for Indias super-rich to open a bank account in Switzerland than with the countrys largest commercial bank State Bank of India (SBI). As he puts it, one merely has to contact HSBCs India office and they will send a representative to do the paperwork, collect the money in cash and, before the end of the day, the account will be opened.
HSBC, which has been fined $1.9 billion in the US for violating anti-money laundering rules, declined to comment on the specific details of the allegations made by Kejriwal but maintained that under its new senior global leadership team it is taking steps to strengthen compliance, risk management and culture.
While the charges have not been proved, it has prompted the income tax department to conduct a probe. The HSBC list of accounts is being investigated by the income tax department and other departments, Finance Minister P Chidambaram had said during a discussion in the upper house of Parliament in December 2012.
Earlier, in 2011, the government had received a list from France that had details of bank accounts of Indians in HSBCs Geneva branch. Media reports said the finance ministry has once again written to a number of foreign tax authorities, seeking more details on the classified list.
A couple of other activists have also urged the Reserve Bank of India (RBI) to investigate the allegations made by Kejriwal and cancel HSBCs banking licence in India if they are found true. RBI did not respond to Business Standards query on this issue, but according to sources, the central bank is currently probing if HSBC has violated anti-money laundering rules.
All I can say is we are aware of the allegations (against HSBC)...We will not disclose our findings to the public. Only if there is a penalty or fine that will be disclosed, a senior executive of the central bank said on condition of anonymity.
While HSBC may be the latest foreign bank to get sucked into this controversy, it is certainly not the only one. In the last couple of years, top global banks operating in India have earned the regulators wrath for deceiving customers, mis-selling financial products or, in one instance, becoming a victim of a fraud committed by its own employee.
In late 2010, an employee of Citibanks Gurgaon branch was accused of a financial fraud amounting to over Rs 300 crore. The employee, Shivraj Puri, allegedly made false promises to the banks high net worth clients and siphoned money from their accounts. RBI fined Citibank Rs 25 lakh for the Rs 300 crore-fraud in its Gurgaon branch.
A few months later, RBI found that 19 banks flouted derivative norms. Of these, 11 were foreign banks, including Standard Chartered Bank, HSBC, Citibank, Deutsche Bank, Barclays, Bank of America, DBS Bank, Royal Bank of Scotland, JP Morgan Chase, Credit Agricole and BNP Paribas.
The banks failed to carry out due diligence in regard to suitability of products, sold derivatives to users who did not have proper risk management policies and did not follow RBIs various instructions. The banks were penalised Rs 5-15 lakh.
Around then, Standard Chartered, the largest foreign lender in India by branch network, was also accused of mis-selling financial products. Some of its private banking clients alleged that the lender sold them debentures with a promise of an assured rate of return, failing which it would buy them back. Under Indian laws, a bank is not authorised to provide a repurchase option for debentures.
The foreign bank subsequentlybrought in external investors, including non-banking finance companies and investment banks, to buy back these debentures. It is believed to have incurred a loss of around Rs 2 crore because of this debacle.
These incidents prompted RBI to issue, in May 2011, guidelines on the internal vigilance set-up in private and foreign banks. It mandated the appointment of a senior executive as chief vigilance officer, who would collect intelligence about corrupt practices, investigate allegations and take steps to prevent misconduct. RBI also said the chief executive of a foreign bank would be responsible for all types of regulatory and audit compliance.
While industry analysts deny that there is a systemic issue, they agree that there is further scope to tighten internal control systems in some foreign lenders. On the face of it, the chief executive of a foreign bank is responsible for compliance. But many foreign banks are still following the model where business heads do not report to the chief executive and instead are directly reporting to their line managers outside India. In such cases there is an element of risk, said an analyst with a global consultancy firm, refusing to be identified.
According to senior bankers, the multiplicity of these events has to a certain extent prevented foreign banks from getting what they wanted most.
Foreign lenders have long been demanding more branch licences to expand their reach in India. Financial penalties was only one of the ways banks were penalised. RBI did not allow many of the large foreign banks to expand their branch network in the country for more than two years, said the top executive of a large foreign bank in the country.
It may be noted that under a World Trade Organisation (WTO) agreement, RBI is supposed to offer at least 12 branch licences to foreign banks in a year, and the central bank has been honouring its commitment. But between 2009 and 2011, some of the large foreign lenders found it difficult to get its approval for a new branch.
The recent controversy surrounding HSBC may have also cost the bank its proposed deal involving acquisition of Royal Bank of Scotlands retail and commercial banking businesses in India. RBI was not comfortable with the initial structure of the deal, and the transaction was finally called off, as the long-stop date of November 30, 2012 was reached without all conditions being fulfilled.
